When I was a 16 year old counselor-in-training, I sat in Jim Weiss’ cabin at Camp Wachusett and learned about providing discipline. Jim gave a very simple, clear approach for working with children that included consistency and following through on your word. Jim told us not to threaten any punishment that we were unwilling to mete out.
Tongue-in-cheek, Jim said that if we threatened to kill a kid for some infraction, we should be prepared to actually kill him. If we didn’t follow through, that kid and all others who would be watching would ignore our next threat – no matter how benign. He taught us that if you become known for doing precisely what you say you will do, you will be an effective disciplinarian who won’t have to discipline very often.
The Federal Reserve is promising to end this second round of Quantitative Easing (QE II) in June, but they’ve promised it before. Actually they began removing the first pieces and parts of QE I in March 2010, but as the markets swooned over the summer, they returned with $600 billion of QE II.
Now they’re making harsher firmer noises about being really, really, really serious this time. But investors, like campers at Wachusett, don’t really believe they’ll take away the punch bowl.
Certainly there are expectations that if they do allow QE II to end (and I think they will) and an unassisted economy and markets resume their natural struggles, the Fed will show up – again - with QE III. This also does not sound too far-fetched to me.
Now that everyone seems to adopt Missouri’s “Show Me” slogan, there doesn’t seem to exist any news, be it economic, geopolitical, nor environmental, sufficient to move share prices substantively lower.
God knows the first quarter brought plenty of reasons for investors to sell, but none of them succeeded in taking stocks down for very long. As I’ve noted in previous Market Commentaries, this phenomenon is know as “moral hazard.” Investors believe they are protected from losses by Fed intervention, and so they fearlessly bid prices to loftier heights.
Many of you are kind enough to email me regularly with your views on my views. Ok, some of your messages are not so kind, but I appreciate hearing all opinions. Yesterday I received the following email from a broker friend who has over 30 years of experience.
Here is an interesting set of facts: currently we are paying 10% of revenue to service the debt (in the spirit of never telling it straight, it is 15% if you count the interest on the Social Security borrowings). The average interest paid on treasuries for the last 30 years is 5.81%. Reversion to the mean interest rate would consume 30% of revenue. Are we living in never-never-land?
Yes, we’re living in never-never-land, but the real-world effects of trillions of government dollars continue to have a very real effect. The level of obstinate denial on the part of bulls is stunning. If the Fed will stick to its guns and not shovel more money when things slow after the current QE 2 ends in June, then prices will correct as they should in a free market environment. The boatloads of government money have disrupted free-market price discovery. I think they needed to intervene during crisis depths, but though the depths have long passed, they seem addicted to stimulus. It’s frustrating as can be for those of us who own stable balance sheets and earnings growth, but we should have our day. John Maynard Keynes said that “markets can remain irrational longer than you can remain liquid.” We just need to stay liquid through the current unpleasant irrationality.
Hang in there,
Most investors make the same mistakes over and over again. Abandoning your discipline when market conditions create headwinds is a critical error. In the past few weeks I’ve talked with a dozen people who sold in January and February of 2009 as the market was approaching its lows. They have not invested again, and they are upset and frustrated with themselves. Stick with your discipline, and focus on your long-term goals. Investing isn’t easy, but when done properly, the rewards are ample.
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.